Next recession: BlackRock warns of new threat for the first time in years



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What if the source of the next big global market disruption is not as obvious as a recession?

Jean Boivin, global head of research at the BlackRock Investment Institute, answered this question.

The next crisis could rather come from a combination of slow growth and slightly higher inflation than observed in recent years, he told Business Insider during a recent interview.

It's a combo that could surprise investors and mark a major regime change, he said. Since the Great Recession, for example, the growth of the economy has failed to really raise inflation. This is a shift that challenges even the smartest minds in finance and challenges the conventional theory that growth and inflation must follow the same path.

"There have been times when we have seen them evolve in different directions," Boivin told the phone by Business Insider. "That's why we insist, because the last five years have not been representative of history and we have seen this type of combination."

He added: "The asset classes will not be the same as in the last five years if we entered this world."

In particular, he highlighted the negative relationship between stocks and bonds; when stocks fall, bond prices rise because investors are tying into Treasury bonds as a safety net. But according to BlackRock's research, this relationship has flourished during the period of low inflation that investors have become accustomed to.

The chart in the red zone below shows that inflation has been moderate compared to expectations for decades, and the yellow line shows that the negative correlation between stocks and bonds is still intact.

Black rock

This negative correlation risks being disrupted by the combination of high inflation and low growth, Boivin said.

In terms of what might trigger the risky combination, he spoke of trade protectionism: if the world's largest economies continued to restrict free trade, they would increase the prices of goods and hinder economic production. And this two-part risk is more pressing for Boivin than a recession.

Read more: BlackRock's global research leader explains why the main driver of the stock market has changed – and explains how investors should adapt to this big change

To understand why he does not see the recession as the greatest risk for the markets, look no further than the decisive pivot of central banks in easing monetary policy. The European Central Bank was the first to report in June that it was abandoning its policy of patience and was becoming increasingly involved in the economy. The Federal Reserve then confirmed the view of the bond market that interest rates should be lowered over the next year.

Stock market investors have applauded the Fed's pivot, reaching unprecedented highs. But the impact of what the Fed has done could go beyond the market's reaction – it will likely avoid a recession and stretch the longest economic expansion in its history, according to Boivin.

That's why he recommends investors stay positive on risky assets, even though trading has created uncertainty about the global economy.

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